Q3 2018 Earnings Call

Company Achieves Record Total Revenues for the Fourth Quarter and Full Year
Company Achieves Record Non-GAAP Net Income for the Fourth Quarter and Full Year

Beijing, China, February 6, 2012 – Changyou.com Limited (“Changyou” or the “Company”) (NASDAQ: CYOU), a leading online game developer and operator in China, today announced its unaudited financial results for the fourth quarter and fiscal year ended December 31, 2011.

Fourth Quarter 2011 Highlights 1

• Total revenues reached a record US$137.7 million and increased 7% quarter-over-quarter and 39% year-over-year. Excluding revenues from the recently acquired game information portal operated through the 17173.com Website (the “17173 Business”), total revenues increased 5% quarter-over-quarter and 37% year-over-year to US$125.2 million and exceeded the high end of the Company’s guidance by US$0.2 million.

• Non-GAAP3 net income attributable to Changyou.com Limited was US$71.2 million, or US$1.33 per fully diluted ADS. Non-GAAP net income attributable to Changyou.com Limited increased 13% quarter-over-quarter and 28% year-over-year. Excluding non-GAAP net income from the 17173 Business, non-GAAP net income attributable to Changyou.com Limited increased 13% quarter-over-quarter and 23% year-over-year to US$61.0 million, and exceeded the high end of the Company’s guidance by US$1.0 million. Excluding non-GAAP net income from the 17173 Business, non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited were US$1.14.

1、On December 15, 2011, Changyou completed the acquisition from Sohu.com Inc (“Sohu”) of the 17173 Business. As Changyou and the 17173 Business were under common control by Sohu both before and after the closing of the acquisition, in accordance with ASC 805-50, Changyou’s unaudited consolidated financial information reported in this press release, unless otherwise stated, has been prepared as if the 17173 Business had been owned and operated by Changyou throughout the periods presented. For unaudited financial information before the inclusion in Changyou’s unaudited consolidated financial statements of the results of operations of the 17173 Business, please refer to the accompanying “Supplementary Notes – Condensed Consolidated Statement of Operations” and “Supplementary Notes – Reconciliations of Non-GAAP Results of Operation Measures to the Nearest Comparable GAAP Measures.”

3、Beginning in the fourth quarter of 2011, the Company revised its non-GAAP reporting methodology to exclude goodwill impairment, impairment of intangibles via acquisitions of businesses and related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions, in addition to its historical practice of excluding share-based compensation expense from non-GAAP results. Explanation of the Company’s non-GAAP financial measures and related reconciliations to GAAP financial measures are included in the accompanying “Non-GAAP Disclosure” and “Reconciliations of Non-GAAP Results of Operation Measures to the Nearest Comparable GAAP Measures.”

Mr. Tao Wang, Changyou’s chief executive officer, commented, “Tian Long Ba Bu, or TLBB, continues to be a winner for us, based on its loyal fan base and our ability to deliver high-quality innovations that keep the game attractive. For TLBB, our latest major expansion pack, TLBB3, was a big factor in our record-breaking results for the fourth quarter and for the full year. DDTank, the flagship game of our new subsidiary 7Road, continues to be one of the top-ranked Web-based games on game portals and social networking sites in China. During the year, we completed a strategic review and implemented a number of changes reflecting the diversity of our business going forward, with separate teams and roadmaps for MMO games, Web-based games, mobile and social games, user platforms, and the international market. We expect these expanded strategies to carry us into the next phase as we evolve reflecting new story lines, new technology and changing user preferences for online games in China and the world.”

Mr. Dewen Chen, president and chief operating officer, continued, “Late in the year, we jumpstarted our platform-based strategy with the acquisition of 17173.com, one of China’s leading portals for news and information about online games. We plan to invest in 17173 to make it even more user friendly by adding services and access to a variety of games designed for different platforms and user communities. We regard 17173 as both a brand builder and a building block to developing our platform business, offering a one-stop-shop for gamers of all types, which will help to deepen and expand the Changyou community online.”

Mr. Alex Ho, Changyou’s chief financial officer, added, “A strong fourth quarter helped to make 2011 a record-breaking year, in terms of total revenues and full year non-GAAP net income. We were able to exceed our expectations for the quarter. We owe this to the continuing strong performance of our MMORPG business, which we expect will give us the cash flows and financial leverage to execute our strategic plans. With a rich cash reserve and a debt-free balance sheet, we are well-positioned to invest in emerging opportunities in other fast-growing segments of the industry and to enhance shareholder value over the long term.”

Fourth Quarter 2011 Operational Results

The Company’s operational results for the fourth quarter of 2011, which exclude those of 7Road’s Web-based game, were as follows:

• Aggregate PCU for the Company’s games increased 2% quarter-over-quarter and 14% year-over-year to 1.17 million.

• Aggregate APA for the Company’s games increased 5% quarter-over-quarter and 18% year-over-year to 3.17 million.

• ARPU for the Company’s games increased 2% quarter-over-quarter and 1% year-over-year to RMB221, which is consistent with the Company’s intention to have ARPU within a range that keeps the Company’s games affordable for the majority of Chinese game players.

7Road’s operational results for the fourth quarter of 2011 were as follows:

• Active accounts5 for 7Road’s game were 41.9 million, a decrease of 11% quarter-over-quarter.

• Average revenue recognized per active charging accounts7 for 7Road’s game were RMB38, and was flat quarter-over-quarter.

5、Active accounts are defined as registered accounts that were logged in at least once during the period.

6、Active charging accounts are defined as the number of active accounts that purchased virtual currency for use in the game during the period.

7、Average revenue recognized per active charging accounts is defined as net revenues recognized by 7Road for the period divided by the number of active charging accounts for the same period.

Basis of Presentation for Unaudited Financial Results

On December 15, 2011, Changyou completed the acquisition from Sohu of the 17173 Business. As Changyou and the 17173 Business were under common control by Sohu both before and after the acquisition, in accordance with ASC 805-50, Changyou’s unaudited consolidated financial information reported in this press release, unless otherwise stated, has been prepared as if the 17173 Business had been owned and operated by Changyou throughout the periods presented. Tables showing Changyou's unaudited financial information before the inclusion of the results of operations of the 17173 Business in Changyou’s unaudited consolidated financial statements are provided for investors’ reference in the accompanying “Supplementary Notes – Condensed Consolidated Statements of Operations” and “Supplementary Notes – Reconciliations of Non-GAAP Results of Operation Measures to the Nearest Comparable GAAP Measures.”

To enhance investors’ overall understanding of Changyou's current financial performance and prospects for the future and consistent with the approach taken by other leading technology companies, beginning in the fourth quarter of 2011, the Company revised its non-GAAP reporting methodology to exclude goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions, in addition to its historical practice of excluding share-based compensation expense from non-GAAP results. Like share-based compensation expense, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions, cannot be anticipated by management, and these expenses are not built into the Company’s annual budgets and quarterly forecasts, which generally will be the basis for information Changyou provides to analysts and investors as guidance for future operating performance. In general, the monthly financial results for internal reporting and any performance measure for commissions and bonuses are based on non-GAAP financial measures that exclude share-based compensation expense, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions.

Fourth Quarter 2011 Unaudited Financial Results

Revenues

Total revenues for the fourth quarter of 2011 increased 7% quarter-over-quarter and 39% year-over-year to US$137.7 million. Excluding revenues from the 17173 Business, total revenues increased 5% quarter-over-quarter and 37% year-over-year to US$125.2 million and exceeded the high end of the Company’s guidance by US$0.2 million.

Online game revenues, which include revenues from Changyou’s game operations and overseas licensing revenues and revenues from 7Road, increased 6% quarter-over-quarter and 34% year-over-year to US$123.3 million. The increases were mainly due to the growth and ongoing popularity of TLBB in China.

Online advertising revenues, which consist of revenues from the 17173 Business, increased 28% quarter-over-quarter and 65% year-over-year to US$12.4 million. The increases were mainly due to higher advertising spending by advertisers to promote the upcoming launch of new games in the fourth quarter of 2011.

Other revenues, which consist of cinema advertising revenues, were US$2.0 million, down 38% quarter-over-quarter. The decrease was mainly due to the Company streamlining its operations of the cinema advertising business in the fourth quarter of 2011.

Gross profit

Gross profit and non-GAAP gross profit increased 6% quarter-over-quarter and 30% year-over-year to US$116.7 million. Both gross margin and non-GAAP gross margin were 85%, which was the same as for the third quarter of 2011, compared with 90% in the fourth quarter of 2010.

Gross profit and non-GAAP gross profit of the online games business increased 6% quarter-over-quarter and 29% year-over-year to US$106.9 million. Both gross margin and non-GAAP gross margin of the online games business were 87%, which was the same as for the third quarter of 2011, compared with 90% in the fourth quarter of 2010. The year-over-year decline in gross margin and non-GAAP gross margin of the online game business were mainly due to higher bandwidth costs incurred for new games and the hiring of game operation staff in the fourth quarter of 2011.

Gross profit of the online advertising business increased 31% quarter-over-quarter and 71% year-over-year to US$11.3 million. Non-GAAP gross profit of the online advertising business increased 31% quarter-over-quarter and 70% year-over-year to US$11.4 million. Gross margin of the online advertising business was 91%, compared with 89% in the third quarter of 2011 and 88% in the fourth quarter of 2010. Non-GAAP gross margin of the online advertising business was 92%, compared with 90% in the third quarter of 2011 and 89% in the fourth quarter of 2010. The quarter-over-quarter and year-over-year increases in gross margin and non-GAAP gross margin of the online advertising business were mainly due to an increase in online advertising revenues in the fourth quarter of 2011.

Gross loss and non-GAAP gross loss of other business were US$1.6 million compared with US$0.2 million in the third quarter of 2011. The increases in gross loss and non-GAAP gross loss of other business were mainly due to lower cinema advertising revenues in the fourth quarter of 2011.

Operating expenses

Total operating expenses increased 15% quarter-over-quarter and 57% year-over-year to US$43.7 million, which included US$5.4 million of goodwill impairment and impairment of intangibles via acquisitions of businesses. The goodwill impairment and impairment of intangibles via acquisitions of businesses were related to the cinema advertising business.

Product development expenses were US$16.0 million, an increase of 27% quarter-over-quarter and 18% year-over-year. The quarter-over-quarter increase in product development expenses was mainly due to the hiring of game engineers and increased expenses related to royalties for licensed games in the fourth quarter of 2011. The year-over-year increase in product development expenses was mainly due to the hiring of game engineers and a full quarter of product development expenses from 7Road, offset by lower expenses related to royalties for licensed games in the fourth quarter of 2011.

Sales and marketing expenses were US$12.5 million, a decrease of 29% quarter-over-quarter and an increase of 35% year-over-year. The quarter-over-quarter decrease in sales and marketing expenses was largely a result of a reduction in advertising spending for DMD in the fourth quarter of 2011 after the game’s launch in the third quarter. The year-over-year increase in sales and marketing expenses was mainly due to an increase in headcount and higher advertising spending for the promotion of our games in the fourth quarter of 2011.

General and administrative expenses were US$9.9 million, an increase of 29% quarter-over-quarter and 95% year-over-year. The quarter-over-quarter increase in general and administrative expenses was mainly due to an increase in headcount and an increase in bad debt expenses related to the cinema advertising business in the fourth quarter of 2011. The year-over-year increase in general and administrative expenses was mainly due to an increase in headcount, a full quarter of general and administrative expenses from 7Road and an increase in bad debt expenses related to the cinema advertising business in the fourth quarter of 2011.

Operating profit

Operating profit increased 2% quarter-over-quarter and 18% year-over-year to US$72.9 million. Operating margin was 53%, compared with 56% in the third quarter of 2011 and 62% in the fourth quarter of 2010.

Non-GAAP operating profit increased 9% quarter-over-quarter and 25% year-over-year to US$79.8 million. Non-GAAP operating margin was 58%, compared with 57% in the third quarter of 2011 and 64% in the fourth quarter of 2010.

Net income

Net income increased 4% quarter-over-quarter and 22% year-over-year to US$65.4 million. Net margin was 48%, compared with 49% in the third quarter of 2011 and 54% in the fourth quarter of 2010.

Non-GAAP net income increased 12% quarter-over-quarter and 30% year-over-year to US$72.3 million. Non-GAAP net margin was 52%, compared with 50% in the third quarter of 2011 and 56% in the fourth quarter of 2010.

Net income attributable to Changyou.com Limited

Net income attributable to Changyou.com Limited increased 4% quarter-over-quarter and 20% year-over-year to US$64.3 million. Fully diluted earnings per ADS attributable to Changyou.com Limited were US$1.21, up from US$1.16 in the third quarter of 2011 and US$1.00 in the fourth quarter of 2010. Net margin attributable to Changyou.com Limited was 47%, compared with 48% in the third quarter of 2011 and 54% in the fourth quarter of 2010.

Excluding net income from the 17173 Business, net income attributable to Changyou.com Limited increased 3% quarter-over-quarter and 14% year-over-year to US$54.3 million. Excluding net income from the 17173 Business, fully diluted earnings per ADS attributable to Changyou.com Limited were US$1.02, up from US$0.99 in the third quarter of 2011 and US$0.90 in the fourth quarter of 2010. Excluding net income from the 17173 Business, net margin attributable to Changyou.com Limited was 43%, compared with 44% in the third quarter of 2011 and 52% in the fourth quarter of 2010.

Non-GAAP net income attributable to Changyou.com Limited increased 13% quarter-over-quarter and 28% year-over-year to US$71.2 million. Non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited were US$1.33, up from US$1.18 in the third quarter of 2011 and US$1.04 in the fourth quarter of 2010. Non-GAAP net margin attributable to Changyou.com Limited was 52%, compared with 49% in the third quarter of 2011 and 56% in the fourth quarter of 2010.

Excluding non-GAAP net income from the 17173 Business, non-GAAP net income attributable to Changyou.com Limited increased 13% quarter-over-quarter and 23% year-over-year to US$61.0 million, and exceeded the high end of the Company’s guidance by US$1.0 million. Excluding non-GAAP net income from the 17173 Business, non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited were US$1.14, up from US$1.01 in the third quarter of 2011 and US$0.93 in the fourth quarter of 2010. Excluding non-GAAP net income from the 17173 Business, non-GAAP net margin attributable to Changyou.com Limited was 49%, compared with 45% in the third quarter of 2011 and 54% in the fourth quarter of 2010.

Cash balances

As of December 31, 2011, Changyou had a net cash balance of US$330.4 million, which decreased from US$458.6 million as of September 30, 2011 as a result of the Company paying US$146.5 million in the fourth quarter of 2011 for the acquisition of the 17173 Business and paying US$62.8 million for the progress payment of an office building under construction. Operating cash flow for the fourth quarter of 2011 was a net inflow of US$76.7 million.

Fiscal Year 2011 Unaudited Financial Results

Revenues

Total revenues in 2011 increased to US$484.6 million, up 37% year-over-year from 2010. Excluding revenues from the 17173 Business, total revenues increased 36% year-over-year to US$446.4 million.

Online game revenues increased to US$435.5 million, up 33% year-over-year from 2010. The increases were mainly due to the ongoing popularity of TLBB in China, the consolidation of revenue from 7Road starting from June 1, 2011 and the launch of the new game DMD in 2011.

Online advertising revenues increased to US$38.2 million, up 42% year-over-year from 2010. The increases were mainly due to advertisers doing more marketing and promotions for the launch of a greater number of new games in 2011.

Gross profit increased to US$417.1 million, up 30% from 2010. Non-GAAP gross profit increased to US$417.3 million, up 30% from 2010. Both gross margin and non-GAAP gross margin were 86%, compared with 91% in 2010.

Gross profit of the online games business increased to US$385.7 million, up 30% from 2010. Non-GAAP gross profit of the online games business increased to US$385.8 million, up 30% from 2010. Both gross margin and non-GAAP gross margin of the online games business were 89%, compared with 91% in 2010. The decline in gross margin was mainly due to higher bandwidth costs incurred for new games and the hiring of game operation staff in 2011.

Gross profit of the online advertising business increased to US$34.3 million, up 44% from 2010. Non-GAAP gross profit of the online advertising business increased to US$34.4 million, up 43% from 2010. Gross margin of the online advertising business was 90%, compared with 88% in 2010. Non-GAAP gross margin of the online advertising business was 90%, compared with 89% in 2010. The increase in gross margin was mainly due to an increase in online advertising revenues in 2011.

Gross loss and non-GAAP gross loss of other business were US$2.9 million.

Operating expenses

Total operating expenses were US$137.2 million, up 39% from 2010. Total operating expenses in 2011 included goodwill impairment, impairment of intangibles via acquisitions of businesses of US$5.4 million for the cinema advertising business.

Product development expenses were US$52.2 million, up 31% from 2010. The increase in product development expenses was mainly due to the hiring of more game engineers in 2011 and the consolidation of product development expenses from 7Road starting from June 1, 2011.

Sales and marketing expenses were US$49.9 million, up 27% from 2010. The increase in sales and marketing expenses was mainly due to the hiring of more sales and marketing professionals and higher advertising spending for the promotion of new games in 2011.

General and administrative expenses were US$29.7 million, up 52% from 2010. The increase in general and administrative expenses was mainly due to an increase in headcount in 2011 and the consolidation of general and administrative expenses from 7Road starting from June 1, 2011.

Operating profit

Operating profit was US$279.8 million, up 26% from 2010. Operating margin was 58%, compared with 63% in 2010.

Non-GAAP operating profit was US$291.4 million, up 26% from 2010. Non-GAAP operating margin was 60%, compared with 66% in 2010.

Net income

Net income increased to US$248.0 million, up 27% from 2010. Net margin was 51%, compared with 55% in 2010.

Non-GAAP net income increased to US$259.5 million, up 27% from 2010. Net margin was 54%, compared with 58% in 2010.

Net income attributable to Changyou.com Limited

Net income attributable to Changyou.com Limited was US$245.5 million, up 26% from 2010. Fully diluted earnings per ADS attributable to Changyou.com Limited were US$4.61, up from US$3.66 in 2010. Net margin attributable to Changyou.com Limited was 51%, compared with 55% in 2010.

Excluding net income from the 17173 Business, net income attributable to Changyou.com Limited increased 22% year-over-year to US$214.2 million. Excluding net income from the 17173 Business, fully diluted earnings per ADS attributable to Changyou.com Limited were US$4.02, up from US$3.29 in 2010. Excluding net income from the 17173 Business, net margin attributable to Changyou.com Limited was 48%, compared with 53% in 2010.

Non-GAAP net income attributable to Changyou.com Limited was US$256.9 million, up 26% from 2010. Non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited were US$4.81, up from US$3.82 in 2010. Non-GAAP net margin attributable to Changyou.com Limited was 53%, compared with 58% in 2010.

Excluding non-GAAP net income from the 17173 Business, non-GAAP net income attributable to Changyou.com Limited increased 23% year-over-year to US$225.0 million. Excluding non-GAAP net income from the 17173 Business, non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited were US$4.21, up from US$3.43 in 2010. Excluding non-GAAP net income from the 17173 Business, non-GAAP net margin attributable to Changyou.com Limited was 50%, compared with 56% in 2010.

Other Business Developments in the Fourth Quarter of 2011

Changyou completes acquisition of the 17173 Business

On December 15, 2011, Changyou completed the acquisition from Sohu of the 17173 Business for fixed cash consideration of US$162.5 million.

Business Outlook

For the first quarter of 2012, Changyou expects:

• Total revenues to be between US$130.0 million and US$134.0 million, including online game revenues of US$121.0 million to US$124.0 million and online advertising revenues of US$7.0 million to US$8.0 million.

• Non-GAAP net income attributable to Changyou.com Limited to be between US$58.0 million and US$60.0 million.

• Non-GAAP fully diluted earnings per ADS attributable to Changyou.com Limited to be between US$1.08 and US$1.12.

• Assuming no new grants of share-based awards, share-based compensation expense to be between US$1.0 million and US$1.5 million, reducing fully diluted earnings per ADS attributable to Changyou.com Limited by US$0.02 to US$0.03.

Non-GAAP Disclosure

Beginning in the fourth quarter of 2011, the Company revised its non-GAAP reporting methodology to exclude goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions, in addition to its historical practice of excluding share-based compensation expense from non-GAAP results.

To supplement the unaudited consolidated financial information prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”), Changyou's management uses non-GAAP measures of gross profit, operating profit, net income attributable to Changyou.com Limited and diluted net income attributable to Changyou.com Limited per ADS, which are adjusted from results based on GAAP to exclude the compensation cost of share-based awards granted, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions. These measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for, or superior to, GAAP results.

Changyou's management believes that excluding the share-based compensation expense, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions from its non-GAAP financial measures is useful for itself and investors. Further, the amount of share-based compensation expense, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions cannot be anticipated by management, and these expenses are not built into the Company’s annual budgets and quarterly forecasts, which generally will be the basis for information Changyou provides to analysts and investors as guidance for future operating performance. As share-based compensation expense, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions does not involve subsequent cash outflow, Changyou does not factor this in when evaluating and approving expenditures or when determining the allocation of its resources to its business operations. As a result, in general, the monthly financial results for internal reporting and any performance measure for commissions and bonuses are based on non-GAAP financial measures that exclude share-based compensation expense, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions.

The non-GAAP financial measures are provided to enhance investors’ overall understanding of Changyou's current financial performance and prospects for the future. A limitation of using non-GAAP gross profit, operating profit, net income attributable to Changyou.com Limited and diluted net income attributable to Changyou.com Limited per ADS, excluding share-based compensation expense, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions, is that the share-based compensation charge has been and will continue to be a significant recurring expense in the Company’s business for the foreseeable future, goodwill impairment, impairment of intangibles via acquisitions of businesses and the related tax impact, non-cash tax benefits from excess tax deductions related to share-based awards and income from the reversal of contingent consideration previously recorded for acquisitions may recur in the future. In order to mitigate these limitations the Company has provided specific information regarding the GAAP amounts excluded from each non-GAAP measure. The accompanying tables include details on the reconciliation between GAAP financial measures that are most directly comparable to the non-GAAP financial measures the Company has presented.

Notes to Financial Information

Financial information in this press release other than the information indicated as being non-GAAP is derived from Changyou's unaudited financial statements prepared in accordance with GAAP.

Mezzanine Equity consists of non-controlling interests in 7Road and a put option that gives the non-controlling shareholders the right to put their shares to Changyou at a pre-determined price if 7Road achieves specified performance milestones before the expiry of the put option and certain other circumstances occur. The put option will expire in 2014. Non-controlling interests of 7Road and the put option are classified as mezzanine equity in Changyou’s consolidated balance sheets, as redemption of the non-controlling interests is not solely within the control of Changyou.

In accordance with ASC subtopic 480-10, Changyou accretes the balance of non-controlling interests to its redemption value over the period from the date of 7Road acquisition to the earliest exercise date of the put right. Any subsequent changes in the redemption value are considered to be changes in accounting estimates and are also recognized over the same period as net income attributable to mezzanine classified non-controlling interests.

Safe Harbor Statement

It is currently expected that the Business Outlook will not be updated until the release of Changyou's next quarterly earnings announcement; however, Changyou reserves the right to update its Business Outlook at any time for any reason.

This announcement contains forward-looking statements. Statements that are not historical facts, including statements about the Company’s beliefs and expectations, are forward-looking statements. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements involve inherent risks and uncertainties. The Company cautions that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Potential risks and uncertainties include, but are not limited to, the continuing global financial and credit markets crisis and its potential impact on the Chinese economy, the uncertain regulatory landscape in the People's Republic of China, fluctuations in Changyou's quarterly operating results, Changyou’s historical and possible future losses and limited operating history, and the Company's reliance on Tian Long Ba Bu as its major revenue source. Further information regarding these and other risks is included in Changyou's Annual Report on Form 20-F filed on February 28, 2011, and other filings with the Securities and Exchange Commission.

Conference Call Information

Changyou's management team will host an earnings conference call today at 7 a.m. U.S. Eastern Time, February 6, 2012 (8 p.m. Beijing/Hong Kong, February 6, 2012).

The dial-in details for the live conference call are:

US:

+1-866-519-4004

Hong Kong:

+852-2475-0994

International:

+1-718-354-1231

Passcode:

CYOU

Please dial in 10 minutes before the call is scheduled to begin and provide the passcode to join the call.

A telephone replay of the call will be available after the conclusion of the conference call at 10:00 a.m. U.S. Eastern Time on February 6 through February 13, 2012. The dial-in details for the telephone replay are:

International:

+1-718-354-1232

Passcode:

42327837

The live webcast and archive of the conference call will be available on the Investor Relations section of Changyou’s website at http://www.changyou.com/ir/.

About Changyou

Changyou.com Limited (NASDAQ: CYOU) is a leading developer and operator of online games in China with a diverse portfolio of online games that includes Tian Long Ba Bu, one of the most popular massively multi-player online (“MMO”) games in China, and DDTank, one of the top-ranking Web-based games in China. Changyou also owns and operates the 17173.com Website, a leading game information portal in China. Changyou began operations as a business unit within Sohu.com Inc. (NASDAQ: SOHU) in 2003, and was carved out as a separate, stand-alone company in December 2007. It completed an initial public offering on April 7, 2009. Changyou has an advanced technology platform that includes advanced 2.5D and 3D graphics engines, a uniform game development platform, effective anti-cheating and anti-hacking technologies, proprietary cross-networking technology and advanced data protection technology. For more information, please visithttp://www.changyou.com/ir/.